In re Dynagas LNG Partners LP Sec. Litig.

• Citation: 504 F.Supp.3d 289
• Decision Date: 25 November 2020
• Docket Number: Master File: 19-CV-4512 (AJN)
• Parties: IN RE DYNAGAS LNG PARTNERS LP SECURITIES LITIGATION This Document Relates to: All Actions
• Court: U.S. District Court — Southern District of New York

504 F.Supp.3d 289

IN RE DYNAGAS LNG PARTNERS LP SECURITIES LITIGATION This Document Relates to: All Actions

Master File: 19-CV-4512 (AJN)

United States District Court, S.D. New York.

Signed November 25, 2020

MEMORANDUM OPINION & ORDER

ALISON J. NATHAN, District Judge:

Plaintiffs bring this federal securities class action pursuant to Sections 10(b), 20A and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (the "Securities Act") on behalf of themselves and all others who purchased Dynagas LNG Partners LP ("Dynagas") securities during the period from December 21, 2017 through March 21, 2019. Plaintiffs also bring suit against a number of Dynagas officers, controlling entities, as well as several financial institutions that underwrote the SPO. Defendants Dynagas LNG Partners LP ("Dynagas"), Dynagas GP, LLC, and Dynagas Holding Ltd. (collectively, the "Dynagas Entity Defendants"), and UBS Securities LLC, Stifel, Nicolaus & Company, Incorporated, Morgan Stanley & Co. LLC and B. Riley FBR, Inc. (collectively, the "Underwriter Defendants") have now moved to dismiss all of Plaintiffs’ claims.¹ For the reasons given below, Defendants’ motion is GRANTED in part and DENIED in part.

I. BACKGROUND

The following facts are taken from the Amended Complaint and assumed to be true for the purposes of this motion. See Hogan v. Fischer , 738 F.3d 509, 513 (2d Cir. 2013).

A. Origins of Dynagas

On May 30, 2013, Defendant George Prokopiou founded Defendant Dynagas, a Marshall Islands limited partnership, as a wholly owned subsidiary of Dynagas Holding, a privately held company. Dkt. No. 50 ("Am. Compl.") ¶ 54–55. Dynagas "was created to own, operate and acquire LNG tanker ships then owned by Dynagas Holding and employed on multi-year charters." Id. ¶ 54. Dynagas GP, which is wholly owned by Dynagas Holding, was formed to serve as Dynagas's general partner. Id. ¶ 55. At all relevant times, Prokopiou, through Dynagas Holding and Dynagas GP, controlled Dynagas and the assets (that is, the LNG tanker ships) that Dynagas had purchased from Dynagas Holding. Id. ¶ 59. Prokopiou and Dynagas Holding formed Dynagas at least in part to access the financial and equity markets in the United States. Id. ¶ 57. They structured Dynagas "to enable the continued growth and profitability of Dynagas Holding though a series of ‘drop down’ transactions, in which vessels owned by Dynagas Holding would be sold to Dynagas for cash, funded by debt and equity issued by Dynagas," which would in turn shift the risks associated with the industry to Dynagas's shareholders. Id. ¶ 57–59.

Shortly after being created, Dynagas purchased three LNG tanker ships from Dynagas Holding, financed both by private debt and equity issued back to Dynagas Holding. Id. ¶ 60. One of those ships, Ob River , is central to the present dispute. The LNG tanker ships purchased by Dynagas were employed in long-term charter contracts, "which provided Dynagas with steady, predictable revenue for years to come." Id.

Dynagas completed its Initial Public Offering on November 13, 2013. Id. ¶ 61. It sold 12,500,000 shares to the public at $18 per share, raising $225 million in the process. Id. Dynagas Holding retained a 52% interest in Dynagas. Id. Dynagas's common stock was listed on the NASDAQ Global Select Market around November 13, 2013, though Dynagas transferred its listing to the New York Stock Exchange effective December 2014. Id. Prokopiou was appointed chairman of Dynagas's board, a position that he continues to hold. Id. ¶ 62. Dynagas's initial and subsequent filings with the SEC made clear that Dynagas was controlled by Prokopiou and Dynagas Holding, and that its ownership structure created a conflict of interest that could result in actions being taken to the benefit of Prokopiou or Dynagas Holding and to the detriment of its shareholders. Id. In order to assure public shareholders that they would participate in the company's earnings, the IPO Prospectus stated that Dynagas's partnership agreement required the company to distribute all of its available cash to its stockholders on a quarterly basis. Id. ¶ 63. The Prospectus also stated that "the Company intended to make quarterly distributions to holders of its common stock of at least $0.365 per share (36.5 cents)." Id.

Until 2017, Dynagas's quarterly distributions manifested that intent. On February 20, 2014, the Company's distribution of $0.1746 per share roughly equaled $0.365 per share, once pro-rated to account for the fact that Dynagas had only been public for around half of the prior quarter. Id. ¶ 64. Throughout 2014, Dynagas's distribution to holders of its common stock was at least $0.365 per share. Id. In 2015, 2016, and 2017, the distribution was of $0.4225 per share. Id. During this time, Dynagas assured investors that its fixed charters provided steady and predictable cash flows, stemming from the fact that it derives most of its revenue from steady long-term charter contracts with reliable counterparties. Id. ¶ 65. The cash flow was thus predictable to Dynagas and its leadership. Id. The net result was a substantial, consistent quarterly distribution that attracted institutional and individual investors. Id. As noted in a May 14, 2016 article in The Motley Fool , this structure provided investors with a "high-yield dividend stock" that offered "sustainable, generous dividend income." Id.

By the end of 2015, Dynagas owned six LNG tanker ships, all acquired from Dynagas Holding; at the time that these ships were "dropped down," all were employed in long-term charter contracts. Id. ¶ 67. Two of those ships—the Ob River and the Arctic Aurora —were operating under charter contracts that were set to expire in late 2017 and August 2018, respectively. Id. ¶ 69. On March 31, 2016, Dynagas announced that the then-current charter for the Ob River had been extended until May 1, 2018, and that Dynagas "had entered into a new long-term contract for the Ob River with its then-current charterer, to commence immediately upon the expiration of the prior charter (on or about May 1, 2018)." Id. ¶ 70. As would later become clear, the new contract provided a significantly lower rate that would be paid to Dynagas than it had received in the prior arrangement. Id. On December 20, 2017, meanwhile, Dynagas entered into a new long-term charter contract for the Arctic Aurora with the same entity to which it was then chartered. Id. ¶ 72. Like with the new Ob River contract, the new Arctic Aurora charter contract "provided that a lower rate would be paid to Dynagas than what Dynagas was receiving at the time." Id. As Dynagas's earnings declined in 2017, the company adjusted its distribution to $0.25 per share. Id. ¶ 73. As the company's CFO, Defendant Michael Gregos, subsequently admitted, Dynagas intended to sustain the $0.25/share distribution by issuing and selling new equity. Id. ¶ 74.

B. Class Period

The Class Period for this litigation begins on December 21, 2017, when Dynagas filed a shelf registration statement that permitted it to issue up to $750 million in new securities. Id. ¶ 75. The prospectus attached to, and incorporated into, the shelf registration statement omitted the terms of the new long-term charter contracts that the company had entered into with respect to the Ob River and the Arctic Aurora. Id.

The December 21, 2017 prospectus, which was signed by both the Director and the Officer Defendants, stated that "[i]n December 2017, we entered into a time charter contract with Statoil for the employment of the Arctic Aurora. This charter will be in direct continuation of the vessel's current charter with Statoil (interrupted only by the vessel's mandatory statutory class five-year special survey and dry-docking) and will have a firm period of three years +/- 30 days. Statoil will have the option to extend the charter term by two consecutive 12-month periods at escalated rates." Id. ¶ 76.

That prospectus also incorporated by reference the risk factors enumerated in Dynagas's 2016 Annual Report, which stated that "[i]f any of our charters is terminated, we may be unable to re-deploy the related vessel on terms as favorable to us as our current charters, or at all. If we are unable to re-deploy a vessel for which the charter has been terminated, we will not receive any revenues from that vessel, and we may be required to pay ongoing expenses necessary to maintain the vessel in proper operating condition. Any of these factors may decrease our revenue and cash flows. Further, the loss of any of our charterers, charters or vessels, or a decline in charter hire under any of our charters, could have a material adverse effect on our business, results of operations, financial condition and ability to make minimum quarterly distributions and other distributions to our unitholders." Id. ¶ 79.

On December 21, 2017, Dynagas also issued a press release that stated that "[t]he Partnership has entered into a new three year charter agreement with Statoil ASA ("Statoil") for the employment of the Arctic Aurora, [ ] (the "Extended Charter").... The Extended Charter is expected to commence in the third quarter of 2018 in direct continuation of the Current Charter.... Statoil will have the option to extend the Extended Charter by two consecutive 12-month periods at escalated rates." Id. ¶ 81.

On February 15, 2018, Dynagas issued a press release which stated that "[o]n December 20, 2017, the Partnership entered into a new three-year charter agreement with Statoil for the employment of the Arctic Aurora .... This new charter for the Arctic Aurora is expected to commence in the third quarter of 2018, in direct continuation of the current charter with Statoil." Id. ¶ 84.

The following day, on a conference call, officers of Dynagas were asked, "[t]here has been some talk around the spot charter rates[,] but have the 3, 5 and 7-year time charter rates responded in recent months as well?" In...